Excess inventories ordered by Aztech's key customers accumulated during the pandemic is not helping too, he adds.
As described by Tng in his June 16 note, Aztech’s customers are mainly US companies, and its main production base will be in Malaysia henceforth instead of China.
Via its 300,000 sq ft plant at Pasir Gudang in Johor, Aztech has the capacity to take on more business if the opportunity arises.
"We think US companies are reassessing their supply chains in Asia, with Malaysia likely still a beneficiary despite the worry of reciprocal tariffs," says Tng.
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He adds that Aztech still has $110 million in unused proceeds from its March 2021 IPO to fund further capacity expansion if needed.
At the same time, its currently vacant 86,000 sq ft plant at Gelang Patah, Johor could also be mobilised to support new customers if needed.
Meanwhile, Aztech's plant in Dongguan, China, is only operating at an average of 30% of its previous capacity following a rationalisation of its production activities there.
Nonetheless, the company is not making a full exit from Dongguan given the still robust electronics manufacturing supply chain in China.
For now, Tng is staying cautious. Aztech, in its 1QFY2025 business update, highlighted that it has 5 new customers but Tng says their volume will not be "significant" this current FY2025.
"Efforts to diversify into other product lines at its key customer will take longer than FY2025," he says.
Order flow this year will remain weak, posing downside risks to Aztech's earnings, warns Tng.
Tng continues to value this stock at its 4-year average P/E of 8.4x FY2026 earnings estimates, thereby deriving his target price of 41 cents.
Upside risks include potential new customer wins and winning more projects from its main customer, and a potential one-time gain if Aztech disposes of its vacated plant at Gelang Patah.
On the other hand, derating catalysts include order cancellations due to economic slowdown affecting demand, and volatile foreign exchange rate movements affecting its financials.
In addition, Tng is specifically flagging the over-reliance risk from Aztech's single largest customer. If orders from this customer do not recover or drop further, this could hurt the company's earnings significantly.
As at 2.03 pm, Aztech Global shares gained 0.87% to trade at 58 cents.
